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TL;DR

Jensen's Inequality: For a convex function f, f(E[X]) <= E[f(X)]. This concept is essential for quantitative trading interviews and is frequently tested at top firms.

By Valenke Exam Prep Team·Last updated 2026-06-01
Analysis

Jensen's Inequality

For a convex function f, f(E[X]) <= E[f(X)].

Jensen's inequality: If ff is convex and XX is a random variable: f(E[X])E[f(X)]f(E[X]) \leq E[f(X)] If ff is concave, the inequality flips: f(E[X])E[f(X)]f(E[X]) \geq E[f(X)]. Intuition: A convex function "bows up." The function value at the average is less than the average of the function values. Common applications: - f(x)=x2f(x) = x^2 is convex: E[X]2E[X2]E[X]^2 \leq E[X^2], so Var(X)0\text{Var}(X) \geq 0 - f(x)=lnxf(x) = \ln x is concave: lnE[X]E[lnX]\ln E[X] \geq E[\ln X], proving AM \geq GM - f(x)=exf(x) = e^x is convex: eE[X]E[eX]e^{E[X]} \leq E[e^X] When to use: Bounding expectations of nonlinear functions. Proving that averages behave better than individual values. Establishing moment inequalities. This is a fundamental technique — many specific inequalities (AM-GM, power mean) are special cases.

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